Valuation conundrum of healthcare-related stocks in US and M’sia

THE United States, which is the epicentre of the Covid-19 pandemic, is the base for some of the world’s largest healthcare companies. These companies are in the race to find a vaccine for the virus and have from time to time disclosed the progress of finding a wonder drug to prevent the spread of the virus.

However, the valuations of the more established pharmaceutical companies have remained sober even though the companies are in the forefront of the search to find a vaccine.

The share prices of companies such as Johnson & Johnson Inc, Pfizer Inc and Gilead Sciences Inc are not hitting the roof despite the attention these companies are getting on the possibility of them finding a vaccine, which would bring about a structural change in its earnings.

The prices of these companies are below their recent highs that was reached in February this year and the valuations are between 13 times and 18 times forward earnings.

The only exception is a loss-making biotechnology company, Moderna Inc whose share price has skyrocketed after it signed a deal with the US government where it receives financial aid to speed up the testing process for a vaccine. Moderna has a vaccine ready for testing on humans and is one of the 20-odd companies in the race to find a remedy for Covid-19.

Moderna’s share price has gone up by 174% year-to-date to US$53 per share. But Moderna’s euphoric rise is one of the few cases. It’s not an across the board movement of shares in the sector.

In comparison, most pharmaceutical and personal care related companies are enjoying a splendid run on Bursa Malaysia are trading at lofty valuations without an earnings track record or a cutting edge product to support its price.

For instance, HLT Global Bhd, a company whose core business is to provide support services for the glove industry is trading at a historic price earnings multiple of more than 50 times, based on its price of 50 sen per share at the time of writing.

The PE ratio of HLT Global may seem undemanding if the likes of Top Glove Corp Bhd and Hartalega Holdings Bhd are trading at historical PE ratio of close to 70 times.

However, fund managers and analysts feel that the valuations of the glove manufacturers are justified considering the earnings growth. Analysts generally are looking at glove manufacturers to more than double their earnings in the current year and next, hence justifying its valuation.

“However, not all the stocks are going to see their earnings double in the current year of operations or even next. And what happens if a vaccine is found. The interest will drop, ” says a fund manager.

A vaccine is the primary mission of nearly all pharmaceutical companies in the United States and Europe. From Sanofi of France to Johnson & Johnson and Pfizer of the United States they racing to find a vaccine.

Some of the savvy fund managers are confident that a vaccine would be found sooner than later.

Billionaire fund manager Nelson Peltz of Trian Partners had told a news channel in a rare interview on Thursday that he had never seen so much cooperation between governments and pharmaceutical companies and within the pharmaceutical industry itself with a common objective of finding a vaccine.

Although there are more than 70 universities and companies working on finding a cure, so far there is no approved treatment or vaccine for the virus that has claimed more than 190,000 lives worldwide.

To expedite the solution for this virus, companies have been receiving funding and assistance from the US government backed Biomedical Advanced Research and Development Authority (Barda).

Among the companies are Johnson & Johnson that is reported to have received US$1bil from Barda. However, the valuations of Johnson & Johnson remained at less than 20 times its forward earnings even though it is touted as among the beneficiaries of the Covid-19 pandemic. Moderna has also received funds from Barda.

A fund manager says the situation in Malaysia cannot be compared with the United States, which has depth in the number of companies that investors can choose to put their money in.

On Bursa Malaysia, the fund manager says that there is a concept play on healthcare and personal care related stocks.

“But the choices are limited ending with a lot of liquidity going into few companies, ” says the fund manager.

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